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Are auditors abdicating responsibility, or simply following the rules?

Blue-chip accounting and auditing firm Grant Thornton has found itself under scrutiny following the collapse of the café chain Patisserie Valerie in the UK. Patisserie Valerie went into administration recently after a £40 million ($52.5 million) hole was uncovered in its balance sheet, allegedly caused by an internal fraud. 

The company’s former finance director has been arrested on suspicion of fraud, but fortunately for those employed by the chain, recent reports suggest that almost 100 cafés will be rescued in a deal funded by Causeway Capital Partners.

An important issue of public policy has arisen based on claims made by Grant Thornton that it is not the “role of accountants” to uncover fraud. Grant Thornton’s chief executive David Dunckley appeared to try to brush aside criticism, after he told the UK Parliament’s Business, Energy and Industrial Strategy Committee that there was an “expectation gap” that required fixing.  

We’re not looking for fraud, we’re not looking at the future, we’re not giving a statement that the accounts are correct… There has to be an acceptance that if there is a sophisticated fraud happening in a business, the audit as is now… may never see it.

Mr. Dunckley added: 

We are saying [the accounts are] reasonable, we are looking in the past and we are not set up to look for fraud.

These statements are hard to reconcile with what I understand the role of an auditor to be. And this then begs the question: if auditors aren’t looking for fraud, then who is? 

Given that I have huge respect for Grant Thornton as an organization (it is an upper-echelon accountancy organization ranked in the top tier of similar service providers), I am struggling to understand the claim that it is not to blame for a failure in spotting fraudulent behavior that is material to the accuracy of a set of management accounts (or financial statements). 

I am familiar with the role that auditors play in the policing of a company’s books and financial activities. A very high percentage of company frauds are spotted by bookkeepers, auditors and accountants. Those with oversight of a company’s accounts are more likely to spot skullduggery before most of the other company employees, including the board of directors.

If we accept that in some instances the books may have been “cooked,” this normally only acts as a smokescreen for a short time, before an auditor or accountant spots the wrongdoing. 

To my mind, managers of businesses and other corporate stakeholders are reliant on auditors to examine company books and spot any internal or external frauds. Yes, managers have internal bookkeepers too, but the reason businesses use the services of outfits such as Grant Thornton is that sometimes those close to the accounts can’t see “the wood for the trees.” Therefore, an independent auditing process is fundamental to the successful running of a business. 

Securities regulators like the U.S. SEC also look to the audit function as an important tool used to manage the risk of fraud on investors. Statement of Auditing Standards No. 99: Consideration of Fraud in a Financial Statement (commonly referred to as SAS 99) was an edict issued by the Auditing Standards Board of the American Institute of Certified Public Accountants in October 2002 in response to the Enron, Tyco, Adelphia and WorldCom accounting scandals of the day. 

The Sarbanes-Oxley Act of 2002 (SOX) was enacted by the US Congress also in response to the huge accounting frauds on public companies of the day. It imposed higher standards to detect fraud on auditors of the accounts of companies whose securities are listed for trading on a US stock exchange. 

I fully accept that Mr. Dunckley’s observation that: “If people are colluding and there is a sophisticated fraud that may not be caught by normal audit procedures” has validity. But we are not talking about a worldwide conglomerate here. We are talking about a chain of cake shops with a $52.5 million blackhole, which has effectively rendered its business unviable. This very point was made by the committee chair (and Labour Member of Parliament) Rachel Reeves when questioning Mr. Dunckley.

In total, Patisserie Valerie has already lost over 900 jobs. Job losses are the very human cost of such frauds, often overlooked by those with a vested interest in simple profitability. 

To my mind, it is not the fact that the fraud was missed, it is Grant Thornton’s response — seeking to abnegate responsibility to ferret out fraud, when carrying out an audit — that I find hard to come to grips with. As a spokesperson for the law firm which is handling the fallout from the collapse, Philip Rubens, has explained, the identification of fraud matters to the company’s directors, shareholders, creditors and employees.  

He said that under junior Alternative Investment Market rules, company directors assume personal liability for the accuracy of information contained in stock market listing on disclosure documents. The words “personal liability” will send shudders up the spines of those who sign-off on these documents. If your external auditors and accountants tell you up front that they are not looking for fraud, merely stating that the books appear to be satisfactory, how can a manager sign off on them knowing he or she may be personally liable for any losses incurred by people who rely on the accuracy of a set of accounts?

Grant Thornton is facing a reputational issue of some moment. It is now being investigated by the Financial Reporting Council for its Patisserie Valerie audit. Those reading these reports and explanations made by their spokesperson will likely have their confidence dented. The obvious question they must ask themselves is, what is the point of engaging a blue-chip auditing outfit, if its approach as an independent auditor does not include an element of fraud detection?

With thanks to Tony McClements, Senior Investigator at Martin Kenney & Co, for his assistance with this post.


Martin Kenney, pictured above, is Managing Partner of Martin Kenney & Co., Solicitors, a specialist investigative and asset recovery practice based in the BVI, focused on multi-jurisdictional fraud and grand corruption cases | @MKSolicitorsIn 2014 he was the recipient of the ACFE’s highest honor: the Cressey Award for life-time achievement in the detection and deterrence of fraud. He was selected as one of the Top Thought Leaders of the Legal Profession in 2018 and 2019 by Who’s Who Legal International and as the number one offshore lawyer for asset recovery in 2017 and 2018.

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  1. "responsibility to ferret out fraud"

    You're confusing auditors and forensic accountants.

  2. Those interested in following up with the article may want to read Canada's "National Observer"

    article of March 5, 2019 about Deloitte and its attitude towards ethics and neutrality. Extensive

    evidence shows that external auditors rarely detect frauds.

  3. Martin Kenney raises important points here. It defies comprehension that, as GT’s CEO David Dunckley asserts, “we’re not looking for fraud …” and that “if there is a sophisticated fraud happening in a business, the audit as is now… may never see it.” As Martin appropriately asks, “if auditors aren’t looking for fraud, then who is?” Leaving aside momentarily whether the auditor’s mandate is, or should include, active fraud detection, a directly relevant follow-on question arises: are auditors alone adequately trained and able to determine a sophisticated fraud? While accounting, asset misappropriation and other financial frauds will invariably involve falsifications to books and records, there are frequently other signs and symptoms of enterprise fraud not perceptible by normal audit procedures. Certainly GT and other accounting firms should be penalized if malpractice is found. But a useful longer-range response would be an industry-wide corrective, not just payment of a fine and a show of contrition. Such as? Numbers don’t commit fraud; people do. Global accounting firms would do well to develop front-line offerings modelled on the FBI’s Behavioral Analysis Unit—agents specially trained in behavioral science and intelligence analysis—designed to recognize and respond to the shadow data and other complex psychosocial signatures of fraud. Just because economic fraud involves cooking the books doesn’t mean the books are the only places where evidence will be found.

  4. Great comment by Dr Stein.

    While the comments by GT are not very well stated (the CEO probably went too far) if the case of fraud is embezzlement the firm's top management by definition are also not aware of it. An audit is based upon sampling and cannot be expected to uncover fraud simply because it exists. I believe it needs to be evaluated on a case-by-case basis.

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